There are four securities, Security A, B, C, and D. All securities are traded on normal markets.

 

Security D is equivalent to the portfolio of one unit of Security A, one unit of Security B and one unit of Security C: Security D has the same cash flow as Security A, Security B, and Security C combined.

 

Security A is an investment that has cost of $270 today. Then after three years, this security will provide $120 each year for 10 years.

 

Security B is a share of Company X's stock. Company X's stock pays no dividend today. After four years, it will pay its first dividend of $5 per share. The dividend will then grow at 5% for 3 years, and then it will grow at 3% in perpetuity.

 

Security C is a newly-issued 15-year coupon bond with face value of $1000 and coupon rate of some percent. Its coupon is paid annually.

 

Suppose Security A, B, and C are all risk-free. The risk-free interest rate is 9% (which is also the discount rate for all these three securities.)

 

Suppose the current price of Security D is $1703.95. What is the coupon rate of Security C?

Answer rating: 100% (QA)

SOLUTION We know that Security D is equivalent to the portfolio of one unit of Security A one un... View the full answer